Stability, Growth and Jobs
The Committee consisted of the following Members:
Sarah Thatcher, Committee Clerk
† attended the Committee
The following also attended ( Standing Order No. 119(6) ) :
Henry Smith (Crawley) (Con): It is a pleasure to serve under your chairmanship, Mr Williams. It might be helpful to the Committee if I take a few moments to explain the background to these documents and the reason why the European Scrutiny Committee recommended them for debate.
In late 2010, the European Council endorsed measures to increase co-ordination of EU economic governance, including strengthening the stability and growth pact and a European semester, which would tie together consideration of national reform programmes, reports on progress and plans for structural reform, under the Europe 2020 strategy, and stability and convergence programmes reports on fiscal policy, under the stability and growth pact.
The European Council later this week will be the culmination of the second annual European semester. The European Council will be asked to endorse two Commission documents, giving broad overviews, 27 sets of recommendations and opinions addressed to individual member countries, and 12 in-depth reviews of member states in the context of the macro-economic imbalance procedure.
The European Scrutiny Committee has recommended three of these documents for debate: the Commission’s overview of member states’ progress with fiscal policy and structural reforms; the draft of the recommendations and opinions to be addressed to our Government; and the in-depth review of the UK in relation to the macro-economic imbalance procedure. It suggested that, in the debate, hon. Members might want to explore the elements of the growth initiative set out in the Commission’s communication, the Commission’s assessment of the UK’s situation and its draft advice in the other two documents.
The Financial Secretary to the Treasury (Mr Mark Hoban): It is a pleasure to serve under your chairmanship, Mr Williams. When I addressed this Committee in the debate on the 2011 package, we exchanged views on a text that supported the Government’s efforts to reduce the deficit; to restore growth in the UK; and to put in place the conditions for job creation. Almost 12 months later, I note that the Commission’s messages remain broadly the same: support for the Government’s fiscal consolidation strategy; confirmation that ensuring a timely correction of the excessive deficit in a sustainable manner and setting the high public debt ratio on a sustained downward path is the right approach; prioritisation of growth-enhancing expenditure; addressing
But let me be clear: although important, these EU-level recommendations do not extend EU competence, and the UK is not subject to sanctions for not complying with them. Although we broadly agree with the messages contained in the draft recommendations, it is important to remember that they remain voluntary.
My right hon. Friend the Prime Minister and other Heads of State or Government will, as my hon. Friend the Member for Crawley said, give political endorsement to the recommendations at next week’s European Council. That is a crucial element of generating sufficient ownership of these essential reforms at national level. The other crucial element of developing ownership is national Parliaments debating reform priorities and recommendations. I therefore very much welcome today’s debate, and appreciate the Committee’s flexibility in agreeing to hold today’s session at short notice.
Next week’s European Council will also hold discussions in areas of critical importance for the future of the EU. First, restoring growth across the EU remains a vital discussion for all member states, and one that the UK continues to drive. That will build on the statement that the Prime Minister and the 11 other Heads of State or Government wrote to Presidents Barroso and Van Rompuy in advance of the last economic council, setting out a concrete and ambitious agenda for EU-level structural reform. It is essential that the EU makes further progress with this agenda, including by strengthening the single market, driving innovation, being the engine of world trade and reducing the burden of regulation on business.
Secondly, the euro area must put in place the governance arrangements required to create confidence for the future and ensure that fiscal responsibility is hard-wired into the system. As the Chancellor has previously stated, the euro area must accept that the remorseless logic of monetary union inevitably leads to closer fiscal integration.
It is very clear that structural reform is a vital component in delivering a strong and stable economy in not only the UK, but Europe. The recommendations put forward to individual member states must be mirrored at an EU-wide level by action there. Our reforms in education, the labour market, welfare, regulation and the tax system are vital elements alongside fiscal consolidation to ensure that we recover from the legacy that the Government inherited.
Chris Leslie (Nottingham East) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Williams. I have a number of questions for the Minister about the papers before us today, which, by the way, I think were only made available in the Vote Office on Wednesday last week. These are considerable papers, as is the trend in these European discussions, so I would be grateful if you could do what you can, Mr Williams, to impress on the relevant authorities the need to try to make these things available a bit earlier for the benefit of all Members.
My first question to the Minister is about page 27 of the Council’s communication and its recommendations. It says on page 27 that there is a plan for extra billions of euros to be injected into the European Investment Bank. Will the Minister say how much will come from the UK and when that will take place?
Mr Hoban: First, on the content of the documentation, we have sought to be as open as possible and provide as much information to Members as possible to enable them to prepare for the debate. I believe that that was done a week before today’s debate, so it is adequate time. Clearly, the hon. Gentleman has spent his time wisely by being able to refer to page 27 of the document.
On the point about the European Investment Bank, a discussion is going on at the moment about whether there should be an increase in capital for the EIB to enable it to play a fuller part in investment across the European Union. Those discussions have not concluded yet, so it would be wrong to give an indication of how much the UK might be prepared to contribute because we are not at that point yet. However, the EIB plays an important role in supporting growth. In fact, it has invested in projects in the UK and has supported some bank lending initiatives undertaken in the UK. So we, too, benefit from the assistance of that European institution.
Obviously the Minister will recognise the Prime Minister’s reference to Jimmy Carr being “morally wrong” for using the K2 scheme, but does the Minister generally share the Prime Minister’s view and think that the use of offshore tax havens is “morally wrong”?
Mr Hoban: The Prime Minister and other members of the Government— [ Interruption. ] I do not know whether that means the hon. Member for Blyth Valley has made use of tax havens. I suspect that no is the answer. The Prime Minister and the Government have made their views clear on the matter and put them on the record on a number of occasions. I do not wish to repeat them today.
I have a different question relating to page 28 of the report. The Commission apparently came to visit the UK on 27 and 28 March. The first alert mechanism report, under the imbalance procedure of the treaties, was, I think, first published back in February. A 20% drop in the real effective exchange rate triggered the threshold in the alert mechanism scoreboard, and the UK now finds itself one of 12 member states—out of the 27 countries of the EU—warranting “further in-depth analysis” by the European Commission because of the macro-economic developments.
On a technical point, page 39 of the report is exceptionally badly printed. There are a couple of tables—[Interruption.] No, the Minister’s copy is as bad as mine. It is difficult to assess exactly what the Commission is saying here. I would be grateful if the Minister could send a note to the Committee with clearer tables so that we can see what is opaquely hidden behind this rather poor copy.
Let me ask the Minister, in general terms, about this changing set of circumstances affecting the UK economy. Obviously, Moody’s moved the UK to a negative outlook when it came to the UK’s credit rating. Is the Minister still committed to retaining the triple A rating for the UK economy?
Mr Hoban: I will endeavour to find a clearer copy of page 39 for members of the Committee. I am pleased that both the shadow Minister and I have equally bad copies. I would hate him to think that there was any sort of favouritism in giving me, and no one else, a pristine copy.
The hon. Gentleman referred to one agency that gave us a negative outlook on our triple A rating, but there are others that have given us a stable outlook. As a Government, we want to ensure that we stick to our fiscal plans and deliver on the commitments that we have made. That credibility, including but not limited to the triple A rating, has given us the capacity to do other things, such as the national loan guarantee scheme and the “funding for lending” scheme that the Governor and the Chancellor announced a couple of weeks ago. It is important to stick to our plans. These are challenging times. We do not have to look far to see countries that have failed to take the necessary steps to deal with the challenges that they face. We have done the right thing, and the credibility that we have built up is hugely valuable to the future of the UK economy.
“Net lending to the corporate sector was negative in 2011…the Breedon task force on alternative debt markets estimated a substantial ongoing financing gap over the next five years, especially for SMEs.”
We know that Project Merlin has failed, but has the Minister seen the report in The Independent newspaper today under the headline, “Business lending plan fails to cut rates”? A report from Syscap, the business financing firm, pointed out that interest rates on business loans worth less than £1 million have barely changed, falling by only 0.08%, from 3.79% to 3.71%. Will he reiterate, therefore, that he believes that credit easing and the national loan guarantee scheme are a raging success?
Mr Hoban: The hon. Gentleman makes this point about net lending, but there are two aspects of it. One is the amount of new lending that banks make and the other is the amount that businesses choose to repay. Clearly, a number of businesses are deleveraging, as are a number of banks. What we have sought to do is to ensure that businesses looking for finance can find it. That is why Project Merlin was based on gross lending. It showed an increase in the amount of money lent to businesses of all sizes. I dispute the argument that it is a failure.
The national loan guarantee scheme has been up and running since March. Loans made under that scheme are made at a reduced rate, using the benefit of the credibility that the Government’s approach has earned. As a result, we are enabling banks to benefit from the lower funding rate that the Government have compared with the banking system. The scheme is successful and thousands of loans are being made to businesses. We want to expand the “funding for lending” scheme so that a wider range of businesses can benefit from the cheaper funding costs that the Government enjoy at the moment, as a consequence of the decisions that we have taken.
“Address the destabilising impact of high and volatile house prices and high household debt by implementing a comprehensive housing reform programme to increase housing supply and alleviate problems of affordability and the need for state subsidy of housing.”
Obviously, the Commission has an eye to the need to make housing affordable and increase supply. What is the Minister doing about that, and how is it consistent with the Government’s £2 billion reduction in the real-terms housing development budget and the total lack of strategy for making housing more affordable?
Mr Hoban: We have taken a range of measures to tackle housing market issues. For example, we have given housing associations increased freedom to build more properties by relaxing the rules on rent levels. I am sure that the hon. Gentleman welcomed the reforms to
John Hemming (Birmingham, Yardley) (LD): I am pleased to serve under your chairmanship, Mr Williams. On the point about the illegibility of many parts of the documents that we are considering, I refer the Minister to page 393. I am not asking for an additional copy, but I ask whoever prepared the documents to be aware that people actually want to read them. I cannot read any of the headings on page 393, which makes it impossible to understand what the table says, although I can make a reasonably good guess. I think it is due to someone having photocopied colour pages in black and white. As a consequence, we cannot read them. Obviously, that is not an issue for the Minister directly, but it needs to be highlighted. What is the sense of having documents if we cannot read them?
I note that on page 7, the Commission recommends that we implement fully our budgetary strategy. Does the Minister know of anyone in the world other than the Opposition who believes in their policy of too little, too late?
Mr Hoban: My hon. Friend makes an important point. In opposing our strategy, the Opposition seem to be in an almost unique position in economic thought. The OECD and the IMF support what we are doing, as do the EU and most independent commentators. I find it rather odd that the Opposition are holding out against that, and seem so devoid of ideas that they are reduced to repeating the same five-point plan in response to any question that one might ask.
“considerable risks remain that the positive impact of new policies on employment and incomes will be more than offset by declining amounts available for benefits, so poverty, particularly for families with children, risks increasing. Independent estimates forecast that in 2020-21 absolute child poverty will reach its highest level since 2001-02, and that the government will miss targets for reducing child poverty set down in the Child Poverty Act.”
Mr Hoban: My noble friend Lord Sassoon is reiterating the Government’s commitment to that. There is a discussion to be had about the measures used to assess child poverty. At a time when unemployment is rising, it is perverse to believe that child poverty is falling just because it is assessed according to a relative measure. We all recognise that we need to take a range of measures to tackle the issue. We believe that universal credit will lift about 350,000 children out of poverty, and that it will lead to 2.8 million households receiving higher payments. The Government’s message is strong: we want to tackle poverty, and believe that getting more people to work, which is one of the goals of universal credit, is a way of doing that.
I do not know whether the hon. Member for Nottingham East heard the shadow Chancellor being quizzed about the five-point plan on Radio 4 a couple of weeks ago, but he was singularly unable to tell the presenter just what difference it would make in practice.
John Hemming: Page 25 of the documents refers to tax havens. Can the Minister remember anything that the Labour Government did to deal with tax havens? Labour was in power for many years and did nothing.
Mr Hoban: In last year’s Finance Bill, the Labour Opposition voted against our measures to tackle disguised remuneration. They voted in favour of keeping in place a tax loophole. I will not take any lessons from them about tackling tax evasion and aggressive forms of tax planning.
John Hemming: The Commission has asked us to bring our deficit under control. Does the Minister agree with its proposal, on page 27, to increase the EU budget by 7%, or does he think that that is excessive, given that we are trying to control public spending? The Commission should play a part in that as well.
Mr Hoban: My hon. Friend makes an important point. It is absurd for the Commission to lecture member states on tackling public spending when they are wedded to a 10% increase in the 2013 budget and increases in the multi-annual financial framework. We are working with other member states to tackle the issue. The Commission has received a clear message from a number of member states that such increases are simply unacceptable.
Ann McKechin (Glasgow North) (Lab): It is a pleasure to serve under your chairmanship, Mr Williams. To return to page 25 and tax haven policies, what discussions have been held with the Commission about co-ordinating action among member states to tackle tax havens and aggressive tax planning? High-value individuals tend to flip between one nation state and another at frequent intervals. It would be much easier to deal with the issue if we had a co-ordinated policy among Commission states.
Mr Hoban: The hon. Lady should recognise that Governments of all three political colours have espoused the principle that tax issues are a matter for member states to deal with on an individual basis. We have not transferred competence to the European Union on the issue and it would be wrong to go down that route. The Government have invested £1 billion in Her Majesty’s Revenue and Customs to tackle tax evasion. We have also introduced measures in this year’s Finance Bill to take such action. The hon. Lady will recognise, as the Leader of the Opposition noted in his speech on immigration on Friday, that people are mobile and that they move around the EU. We need to make sure that we have a proper tax system that deals with the mobility of individuals, but that is a matter for individual member states, not the EU, to act on.
Neil Parish (Tiverton and Honiton) (Con): A member state not many miles across the water—I will not name it, but it is about 22 miles away—is inclined, especially in hard times, towards protectionism, so the issue is not just protectionism as a barrier between Europe and the rest of the world; we also have to watch out for protectionism returning in Europe.
Mr Hoban: My hon. Friend makes an important point. We discuss the matter regularly in dossiers on financial regulation. This country has thrived as a result of having an open economy. One of the priorities set out in the letter that was sent prior to the Council meeting in March was the need to agree more bilateral free-trade agreements with countries outside the EU, in order to help promote growth not just in those countries, but here in the EU. It is absolutely vital that we look for opportunities to grow our economy, not just by trading with other European Union member states, but by looking beyond the Union’s boundaries to where growth is often at levels of which many member states would be envious. We need to reform our economy in Europe to ensure that we can grow quickly, too.
Mr Ronnie Campbell (Blyth Valley) (Lab): I have been a Member of this place for 25 years, and have been waiting for someone to tackle tax evasion, but that has never happened. It did not happen in the 18 years of the previous Tory Government. [ Interruption. ] I am prepared to admit that it did not happen under us either, but it did not happen when Thatcher was in power, so let us get the record straight. It is all right calling people immoral, but we need something on the statute book, and I very much doubt that will come from the Conservative party.
Mr Hoban: It was the hon. Gentleman’s party that voted against measures on disguised remuneration in last year’s Finance Bill and would have perpetuated a tax loophole, so he cannot lecture us about this—[ Interruption. ] He should hold his Front-Bench team to account for their willingness to connive at some of these tax-planning regimes.
Jesse Norman (Hereford and South Herefordshire) (Con): Does the Minister share my view that one of the great achievements of the Thatcher Government was the lowering of marginal tax rates, which made tax evasion less likely?
Mr Hoban: My hon. Friend makes an important point. The extent to which it is worth people engaging in complex schemes is driven in part by marginal rates. We identified that in our analysis of the 50% rate, so there is a strong argument there.
That the Committee takes note of European Union Documents No. 10834/12, relating to the Commission Communication: Action for stability, growth and jobs; No. 10557/12 and Addendum, relating to the draft Council Recommendation on the United Kingdom’s 2012 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-2017; and No. 10846/12, relating to a Commission Staff Working Document: In depth review for the United Kingdom in accordance with Article 5 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances; welcomes the Commission’s support for the Government's efforts to reduce the deficit and set the public finances on a sustainable path, which is consistent with the conclusions reached by the IMF and the OECD in their recent reviews of the UK economy; takes note of the Commission’s efforts to address timing difficulties with the European Semester; welcomes the Government’s approach to promoting growth domestically and at EU level; and welcomes the Government’s policy of security assurances that the UK cannot be subject to sanctions in respect of the Stability and Growth Pact or the new Macroeconomic Imbalances Procedure [4th Report of Session 2012-13, HC 86-iv, Chapter 3].— ( Mr Hoban .)
Chris Leslie: I do not want to detain the Committee. I did not get much clarification from my questions to the Minister, but it was important to have the debate. Some substantive comment is needed on the significant report before us from the European Commission, which increasingly seems to be sounding the alarm about the Government’s economic strategy.
I note that the motion seeks to congratulate the Government in a number of ways, including on their growth strategy, but on page 50 of the documents that we are considering, the Commission astutely observes:
“Unemployment in the UK currently stands at 8.4%. Youth unemployment is much higher, at 22.2%, and more than 38% of the unemployed in the UK are under 25. 17.7% of young people (16-24 year olds) are not in employment, education or training. Private sector employment has been growing modestly, but not enough to offset reductions in public sector employment and the growth of the workforce.”
I think it is the employment consequences that are leading the Commission to say to the Government, “Please take a moment to think about the human consequences of failing to focus on jobs, economic growth and prosperity.” The Government’s obsessiveness and fixation on their particular path for austerity is causing real harm to the labour market, and unemployment, which is a lagging indicator, is at risk of being exacerbated after this recession that we are enduring.
I have already talked about the effect of Government policy on lending to small firms, and a number of other matters, including housing and welfare, have been raised. On page 51 of the document, the child care issues leapt out at me:
“The UK’s transport sector faces shortcomings in the capacity and quality of its networks, which could work against the government’s aim of rebalancing the UK economy towards investment and exports. As part of the government’s fiscal consolidation strategy, public sector net investment will fall sharply by 2014-15, which risks exacerbating existing pressures on transport infrastructure unless alternative funding sources can be secured.”
The CBI has already warned of the consequences of the Government’s strategy. It said on the Chancellor’s autumn statement, in which he talked about wanting to get £250 billion into infrastructure projects from private funds, that
The Minister needs to deal with that infrastructure question. In particular, in the post-PFI world, the Treasury is flailing around and struggling to develop an alternative capital infrastructure strategy. It seems to be moving nowhere fast.
Even the European Commission recognised that the real economy has an impact on the fiscal strategy of the Government. On page 52 the Commission goes so far as to recommend that the United Kingdom prioritise
Those warnings from the Commission are serious. The Minister seems to be turning a blind eye to them and, worse, has included in the text of today’s motion a suggestion that we should somehow welcome the Government’s approach to promoting domestic and EU growth, when we are one of only two countries in the G20 that are in recession. Having such a comment in the motion is an insult. It betrays not only the Government’s lack of strategy for the economy, but their incompetence and inability to deal with the lack of growth and the recession. For those reasons, we must vote against the motion.
John Hemming: When I was elected in 2010, I strongly supported going into coalition with the Conservatives, to bring the country’s finances under control. It is rather sad in one sense, because people get elected in politics to do things and provide things for people, in my view, and in what happened there was a recognition of a need to reduce public spending.
He said a lot more—so did Lord Turnbull, the Cabinet Secretary at the time of the changes in government in 2005—about the fact that the Labour Government got this country into a mess by spending far too much money and by increasing public spending. Unless we bring that under control, it is the weak people who will suffer. To that extent I am pleased to support the Government in bringing the country’s finances under control.
Mr Campbell: I am amazed. The hon. Gentleman is talking about the Labour Government getting us into a mess; what about the banks? So the banks did not do anything—they are flying free—and did not make any mess? Did we not have to use billions—trillions—to bail out the banks? That is what did us in.
My hon. Friend the Member for Birmingham, Yardley, made the important point that fiscal consolidation is important, and it goes hand in hand with growth. As Barroso said, sound public finances are needed to restore the confidence that is essential for growth, and we need to move beyond a debate on whether there should be fiscal consolidation or growth. We can have both. That very much sets the backdrop for the coalition’s policies and that is why, for example, we have prioritised spending in ways that will support economic growth. I will come on to some of those ways shortly. It was disappointing that Labour Members seemed to scoff at the mention of Tony Blair. He was Labour’s most successful leader, and he has said things that they should listen to and learn from.
Let me deal with the issues that the hon. Member for Nottingham East raised. He talked about the documents from the Commission. Let me point out one of the factors that the Commission mentioned that explains
We are taking action to tackle the rate of youth unemployment; we need to bring down that rate. Youth unemployment is an issue across Europe and, of course, as the right hon. Member for South Shields (David Miliband) has said on a number of occasions, youth unemployment did not start under this Government. We are implementing the youth contract, which includes wage incentives, work experience placements and extra advisers for Jobcentre Plus.
To tackle the issue of low-level skills, we are developing higher apprenticeships, through the higher apprenticeship fund, working in a number of areas where we need better-skilled employees to enable us to compete in the 21st century. That is an initiative that this Government are taking forward. We are also boosting the number of apprenticeship places, and are trying to encourage small and medium-sized enterprises to take on apprentices through our apprenticeship grant scheme. These are concrete measures that we are implementing.
The hon. Member for Nottingham East also talked about child care. We do not agree with the Commission’s assessment. The level of female employment is very high at 69%. The economic activity rate for women is 75%. Clearly, the issues mentioned are not deterring women from participating in the labour market. There is a statutory duty on local authorities to secure sufficient child care to meet the needs of working parents, and 95% of parents take up their entitlement to 15 hours a week of free early education for their children. The Government will expand that provision to cover 40% of two-year-olds by September 2014. There is evidence to suggest that there is significant spare capacity in the child care sector. The National Day Nurseries Association finds that its members are running at an average occupancy rate of about 74%, so there is scope within the system for more parents to put their children into child care.
The hon. Gentleman also talked about transport infrastructure. Let me be very clear that we are prioritising spending on transport infrastructure. When I looked back on our debate on the same subject last year, I found that he made the same point then, and I will make the same point now: schemes have been announced to improve transport spending and our infrastructure. Work is going on in places such as Leeds and the north-west on rail electrification. There is a whole range of projects.
We have published a national infrastructure plan that sets out a very clear plan for constructing a pipeline of 500 public and private infrastructure projects, to give clarity to investors and businesses, which will help them to plan for the future. They can see what we are doing and be part of it. We have also signed a memorandum of understanding with two groups of UK pension funds to target up to £20 billion of investment on infrastructure. There is also a commitment to increase capacity on the A14, and we will explore innovative ways of financing that, including tolls. There are a range of areas where we are tackling transport infrastructure.
We are also tackling infrastructure with regard to broadband, and not just in rural areas; we are creating 10 super-connected cities across the UK. We are doing a lot of work to strengthen our infrastructure, but it is absolutely vital that we focus our expenditure on areas where it is economically beneficial. At the same time, we must ensure that there is proper discipline in public spending. We must use the credibility that we have won in markets through our tough approach to consider other imaginative ways of encouraging investment to come forward.
The fact that the Government have taken tough action has given us the fiscal space for projects such as the national loan guarantee scheme. The Governor of the Bank of England and the Chancellor announced the “funding for lending” scheme in the Mansion house speech a couple of weeks ago, and we will be introducing more proposals shortly. The actions we have taken as a Government are absolutely right to tackle a deficit